A Tale of Two E3s - Xbox vs Sony vs Sega

E3 2013 harked back to the glory days of the trade show. We step back in time and discover striking similarities between E3 this year and the very first expo in 1995

Two of the biggest names in entertainment went head-to-head at the Los Angeles Convention Center.

Both unveiled new video games consoles that would launch against each other in a matter of months.

One company was the current market leader. But it had stumbled en-route to E3, and was on the back foot after a series of poor strategy and business decisions.

And so its rival, the underdog Sony, was able to steal the show in emphatic fashion, with a new machine that was $100 cheaper than its rival.

Meanwhile, Nintendo barely even showed up.

The year was 1995.

"In 1991, CES put us in a tent. You had to walk past all the porn vendors to find us. I was furious with how CES treated the video games industry and I started planning to get the hell out."

- Tom Kalinske, Ex-Sega America boss

During the many interviews MCV conducted at E3 this year, one question we always ended up asking was simply: “So what have you made of the show?”

The answers were pretty much identical.

“It felt like a throwback to the old E3s,” said PlayStation Europe chief Jim Ryan.

“It was great to have a ‘what are they going to do, what are we going to do.’ It was very energising.”

EA chief Andrew Wilson was equally as excited: “I had an absolute ball. Because there was an energy at the show that we haven’t had for years. And that’s pretty special.”

There were two men at E3 this year that were feeling particularly nostalgic.

Tom Kalinske and Steve Race may not be household names in the games industry today, but back in 1995 they were the industry’s Don Mattrick and Jack Tretton. Race was the man charged with introducing PlayStation into a sceptical marketplace. Meanwhile, Kalinske – CEO of Sega America – was tasked with launching the Sega Saturn.

“I went to E3 this year and I said to the guys I was walking around with: ‘You know, this show is kind of back to like it was when we started it,’” Kalinske tells MCV.

“It is because of the competitiveness of the hardware systems. It generates a lot of excitement.”

And competitive is certainly what the games industry was at the first E3 in May 1995. But to truly appreciate the drama that surrounded that show, we have to jump further back in time, to when Kalinske joined Sega in 1990.

Back then Sega was a $70m business in the US. But when Kalinske took control he made Sega America a $1.5bn business in just three years. And with the help of Sonic and some cheeky advertising, he turned the firm's Genesis console (or Megadrive to you and I) into the biggest games machine in the country in 1993 – eclipsing the Super Nintendo.

Kalinske was certainly an influential man and not just at Sega, but in the US video games industry as a whole. He was instrumental in the creation of the US games industry trade body, he was part of the team that introduced the first age ratings system, and he was there at the birth of the Electronics Entertainment Expo.

“Back in the early 1990s we always used to show at CES in Las Vegas,” recalls Kalinske

“We were there alongside the guys that were showing their new automotive speakers, or their new computing systems, or TVs, or telephones, or what have you.

“And the CES organisers used to put the video games industry way, way in the back. In 1991 they put us in a tent, and you had to walk past all the porn vendors to find us, to find Nintendo and ourselves and the third party licensees.

“That particular year it was pouring rain, and the rain leaked right over our new Genesis system. I was just furious with the way that CES treated the video games industry, and I felt we were a more important industry than they were giving us credit for. So I started planning to get the hell out of CES.”

Sega launched its own independent show in 1992, where it invited third party publishers to the Silverado Country Club to show off its titles to retailers. It was a huge success, and the following year Sega went even bigger, and even invited its arch nemesis Nintendo to exhibit “But they didn’t show,” laughs Kalinske. “We were just so competitive back then.”

Meanwhile, as Sega began its slow transition away from CES, the US games industry was embroiled in a heated debate over violent video games. The US Senate was worried that Mortal Kombat was damaging the minds of children, and called for an age ratings system to be introduced for games.

“We started that in 1992 and it was very much like the ESRB one we have today. And I said to the industry, we need an industry-wide rating system and we need an industry association to police it.

“At the time the software publishers association, in our opinion not just mine, wasn’t doing an adequate job in representing the video games industry. They were more concerned about PC software. It took a while but I finally got us all to agree to start the IDSA – the interactive digital software association. The next step was to adapt an industry rating system. And then to create an industry show – because we were important enough to have one.

“To get it going initially, Sega lent the IDSA $300,000 and so did Nintendo. We financed the association, we financed getting the rating system going and we financed the first E3.”

"Ken Kutaragi saw what we had and said let's jointly market a single games console – The Sega/Sony hardware system."

- Tom Kalinske, Ex-Sega

May 1995 and the very first E3 made its debut at the Los Angeles Convention Center. And much like this year’s show, it was awash with new hardware.

But with the 3DO struggling and Nintendo’s new Ultra 64 (or N64 as it became) delayed until the following year, eyes were firmly fixed on the battle between PlayStation and Sega.

But these two juggernauts weren’t always rivals.

“Sony came to us after they had been rebuffed by Nintendo,” remembers Kalinske.

“They had wanted Nintendo to use some technology that they had, and Nintendo instead chose to work with Philips. That really annoyed Sony. Olaf Olafsson [Sony Electronic Publishing President] and Micky Schulhof [President of Sony America] came to my office and said: ‘Tom, we really don’t like Nintendo. You don’t like Nintendo. We have this little studio down in Santa Monica [Imagesoft] working on video games, we don’t know what to do with it, we’d like Sega’s help in training our guys. And we think the optical disc will be the best format.’

“Well I agreed with them, I thought CDs would be the next format as well. But in those days nobody knew how to programme on optical discs. So I said, “Ok. Let’s combine our efforts. Let’s finance Imagesoft, and let’s finance this little developer called Digital Pictures, which seemed to be furthest along in knowing how to programme on optical disc.’ And they financed three titles from Digital Pictures and we did as well.

“So our relationship with Sony was very close and very tight. We together worked a lot of these things out. And Sega of America and Sony were both convinced that the next platform had to use optical discs. We had been working on this CD ROM attachment to the Genesis [Mega CD], which we knew really wasn’t adequate, but it taught us how to make games on this format.

“We had the Sony guys and our engineers in the United States come up with specs for what this next optical-based hardware system would be. And with these specs, Olafsson, Schulhof and I went to Japan, and we met with Sony’s Ken Kutaragi.

“He said it was a great idea, and as we all lose money on hardware, let's jointly market a single system – the Sega/Sony hardware system – and whatever loss we make, we split that loss.”

Kalinske loved the sound of this deal. As Sega made some of the biggest games in the world, he was certain it would be Sega that would make the most money from this deal. All he needed was the Sega Board to say yes.

“Next we went to Nakayama [Sega President] and the Board at Sega, and they basically turned me down. They said: ‘That’s a stupid idea, Sony doesn’t know how to make hardware. They don’t know how to make software either. Why would we want to do this?’ That is what caused the division between Sega and Sony and caused Sony to become our competitor and launch its own hardware platform.”

"People in or close to the video games industry just felt that the Saturn was a move of desperation on Sega's part."

- Steve Race, former PlayStation US boss

This was the first of many disagreements between Sega Japan and its US team in the build-up to E3. In fact, Sega America had little faith in the Saturn and was desperate to improve it.

“I tried to get the launch date delayed so that we had a reasonable amount of software supporting it,” said Kalinske. “I was not successful in those efforts. I had four years where Sega Japan pretty much let me do whatever I wanted, and then this series of events happened where they didn’t, and that’s why I ended up leaving the company.”

Kalinske even went as far as sourcing an alternative graphics chip that the Saturn could use.

“Sega in the US was never meant to get involved with hardware, we were meant to focus on software. But because I was so concerned about the Saturn during its development, we ended up trying to get the specs revised. I had meeting with the head of Silicon Graphics, and he showed me a new chipset that I thought was perfect for the next video games hardware system. I called the hardware group in Japan and they said it wasn’t quite good enough. It was too big. It would cost too much. So Silicon Graphics later asked me: “What do we do?” and I said: “Well there is this other company in Seattle you might want to call.” And of course that chipset ended up in the next Nintendo console – N64.”

Sega had shunned the chance to work with PlayStation or develop a more advanced system. And Sony were now spoiling for a fight. Having been rejected twice by a games industry it was desperate to work with, Sony went it alone and built an entire business unit dedicated to launching its own console. And the electronics giant began by poaching senior staff from the likes of Sega, including Kalinske’s right-hand man, Steve Race.

“He know all our secrets and we didn’t know any of his. And we were in this very uncomfortable position trying to launch this new hardware system, a system that I didn’t believe in and didn't like.”

Race adds: “I had some insight and PlayStation and Sony were able to capitalise on that. I knew the product was slapdash. I knew that they weren’t committed to it. In many ways Sega Japan was forcing products on the United States and Europe.

“People in or close to the video games industry just felt the Saturn was a move of desperation on Sega’s part. It was slapped together in very short order. It was not something we thought was terribly compelling. So we felt we had the winning product.

“We knew that Sega’s heart and soul wasn’t behind Saturn. It was very much a gap product that they were trying to use to spoil the introduction of Sony. What we had to do, we needed to freeze the consumer like a deer in the headlights, and just let them know that the PlayStation was coming and was going to be a substantially better product.

“3DO was struggling mightily. We knew that the Saturn was going to be a stillborn. Sega had made a number of faux pas coming into that console. And Nintendo was just somnambulistic, they were asleep at the switch. So really the stage was ours to make a break.”

"When Sony announced that PlayStation was going to be $299, we said: “Well, gee. We are kinda screwed here aren’t we?”

- Tom Kalinske, Ex-Sega

Sega was stumbling, Sony was confident. Sound familiar? And indeed what happened next certainly had echoes of this year’s E3.

Sega took to the stage first, showed off Saturn, its games and its $399 price point. But then the platform holder surprised everyone by announcing that Saturn wasn’t coming out in September, as previously announced, but was actually launching that day.

“I didn’t want to announce that,” says Kalinske.

“We already had a ship date, but the Board at Sega said that as Sony are launching in the Fall – this the same Board that didn’t believe Sony knew how to do hardware – you have to launch immediately.

“But I said that we don’t have enough hardware to fill the shelves and we don’t have enough software. And they just said: ‘Too bad, you’ve got to launch.’ So then I had to make an awful decision, because I couldn’t give every retailer hardware and software, so I could only do it with a few. Who should I do it with? So we picked a couple of retailers and we launched with them immediately that day at E3, with a little bit of software. So that was the launch. That’s not how you launch a video games console.”

It sounded like an exciting announcement at the time. But the reality of the situation was that Kalinske had managed to alienate many of Sega’s retail partners.

But the biggest shock was still to come later that day when Sony took to the stage.

In the middle of the PlayStation conference, Steve Race was called on stage to deliver a small speech about the new console. He walked up to the podium, simply said “299” and sat back down again. The room exploded.

“Oh the speech? The shortest speech in the history of E3,” laughs Race.

“The interesting thing was that up until the very last minute we were debating what the price was going to be. It was varying between $299 and $399. And myself, my CFO Tom Krause, and Olaf Olafsson, were battling it out with the Japanese to try and get the $299 price point, which we thought was much more compelling.

“We started our discussions in the afternoon before the speech, and even by the morning it was still to be decided. We finally got the go-ahead early morning. I have no idea what I’d have said if they’d have insisted on $399. You could probably tell, but I didn’t have a speech prepared.”

Kalinske added: “We actually thought they were going to be $399. So that was a big surprise, and as it turned out it was a great competitive move for them. Now clearly they lost money at that price for quite a while before they could bring the production cost down. But it was a brilliant move on their part. We didn’t know they were going to do it and when they did it we said: “Well, gee. We are kinda screwed here aren’t we?” Because we weren’t making money at $399, so we knew we had a problem.”

"Japan wouldn’t let us put Sony on the box. It wasn’t convincedPlayStation was something that was going to work and they didn't want to sully the brand. After E3, Sony became more prominent on the boxes"

- Steve Race, ex-Sony

"We were on cloud nine," says Race

“Going into E3 we had a lot of sleepless nights. We had an enormous booth, we had to run a lot of what we were going to show by Japan. They gave us very few degrees of freedom. So in many cases they were changing things that we didn’t want to change, and there were arguments about that, and we’d be flying back and forth to Japan or they would be flying back and forth to us.

“So it was a huge enterprise to get this out. When I joined Sony I was like the sixth employee of PlayStation in United States, and from the time that I joined to the time of E3 was about nine months. We put everything together in that short space of time, including all of the third-party developers. We put together the organisational structure, we hired some people, we put together E3. So we were at the point of exhaustion and I am not quite sure what would have happened if we had gone over with a resounding thud. I am not sure the psyche of the staff would have taken it.

“But as it turned out we were the Belle of the Ball, and everyone knew it. We won booth of the show. We had a huge booth, 100 by 120 feet. We had this spectacular party at the Sony studio in Culver City. Michael Jackson came to the party, and Sting was on the studio set recording, too. It was a terrific show and a terrific party, and we certainly made our presence known. My view made by somewhat shaded, but I thought not only did we win the show, we won it by head and shoulders.

“And any momentum that we had built was magnified coming out of E3, and while we still had our hands full, and we were still exhausted, nonetheless it was gratifying that what we had worked so hard on, so diligently and so fast, was really being acknowledged in the market place.

“The proof was still going to be in the pudding. But I got to tell you that it was a lot easier with retailers post-E3 than it was prior to E3. After E3 everyone was taking their orders up. And that was when the demand outstripped our supply.”

But E3 didn’t just cause an upturn in retail orders, it also brought about a change within the Sony Corporation. Sony was cautious about launching a games console. After E3, that trepidation had gone.

Race adds: “While it was a spectacular show and significantly exceeded even our wildest expectations, it was nonetheless consistent with what we thought was going to happen. But I think for our Japanese counterparts it was much more important to come to the United States, see what the reaction was, feel the vibe towards PlayStation at the show, and see how it stacked up against the competition.

“With the exception of a very small thing on the back, they wouldn’t let us put Sony on the box. They weren’t convinced this was something that was going to work and they didn't want to sully the brand. So we couldn’t prominently feature one of the biggest things we had, which was the Sony brand name.

“It was really odd because I made a presentation to the senior management in the United Stated and the senior management in Japan, and I said that PlayStation – or PSX as we wanted to call it but Japan insisted on PlayStation – was a great opportunity to expand the brand. Sony didn’t have much credibility with the 16 to 21-year-old audience at the time.

“I think that probably fell on deaf ears, which is why we couldn’t put Sony on the package. But after E3, and after our initial sell-in, they saw what the value PlayStation could be to the Sony name. Sony became more prominent on the boxes on the second wave of consoles.”

"We ran a series of in-trade promotions and posters saying that 'If you bought a Saturn, your head was in Uranus.'"

- Steve Race, Ex-Sony

Another moment from E3 2013 that brought back memories of the 1995 expo was the ‘PlayStation Used Game Instructional Video’. The video showed two Sony execs pass a game to one another to explain how to share a PS4 game. It was a humerous attack on Xbox One, which at the time proposed restrictions on how users could share games.

This was not something the modern games industry was used to. This is an age where the big console manufacturers either never referenced each other, or spoke respectfully about their rivals. Yet back in 1995 this kind of banter was commonplace.

“E3 was really fun,” remembers Kalinske.

“Sony played a lot of pranks on us. They deflated my inflatable Sonic character that was at the front of the show. In previous shows against Nintendo, I used to put flyers and leaflets under the doors of retailers’ rooms the night before the show, announcing our new products and pricing, so that Nintendo didn’t have time to react to it.

“Steve Race was with me at Sega when I did that. But when it came to E3 1995, he did the same thing, pretty much, back at me. It was very enjoyable in that sense.”

Race laughs: “We knew Sega was about to launch the Saturn. So we had run a series of in-trade promotions and posters saying that “If you bought a Saturn, your head was in Uranus.”

"E3 today is a platform for stumbling, not necessarily for succeeding. One succeeds by somebody else failing. That's what happened this year between Sony and Microsoft."

- Steve Race, ex-Sony

Yet for all the similarities, E3 ‘95 was a very different kind of show to the one today. Back then E3 was about doing business with retailers, orders were actually made, money was won and lost. Today the expo is mainly a great big press event. Winning and losing E3 today doesn’t quite have the same commercial impact.

“In 1995 we were new entrants,” says Race. “And it was unclear how committed to the market Sony was going to be. So E3 that year took on herculean proportions for us that was probably outsized relative to the real value of the show to most people.

“I’ve attended many of these trade shows, not only in the video games industry but industries in general, and they are no-longer shows where you do deals and write orders. Retailers have every insight into what the product is going to look like, when it is going to get delivered, they’ve already seen many of the games. In today’s market place trade shows like E3 are much less important for retailers. It’s more about posturing and positioning than it is for selling. It’s more like a press event

“Today E3 is a platform for stumbling, not necessarily for succeeding. One succeeds by somebody else failing. It’s almost a zero sum game. Case in point this E3, I think everyone would suggest it was more a case that Sony advanced because Microsoft stumbled.”

Race and Kalinske both left their respective companies shortly after E3. Race to head up Microprose, while Kalinske, with the relationship between himself and Sega Japan in tatters, walked away from the industry altogether.

But they still regularly pop along to E3. They still keep an eye on the latest developments. And they still play games.

And Steve Race concludes by pointing out the one other similarity that the games industry today has with 1995. Perhaps the most important similarity of all.

“Video games is an exciting, difficult, stressful, frustrating industry in many ways,” he says with a smile. “But it is also a lot of fun.”

MCV is the leading trade news and community site for all professionals working within the UK and international video games market. It reaches everyone from store manager to CEO, covering the entire industry. MCV is published by NewBay Media, which specialises in entertainment, leisure and technology markets.